Keynote by Prof. Lorenz Reibling
Investment in real estate abroad requires more than picking the right location, the Refire 2013 conference heard.
Finding the right local people to join your team is the key to success, argued Professor Lorenz Reibling, the co-founder and chairman of Taurus Investment Holdings, speaking at the conference on the Changing Shape of German Real Estate Investment, held at Glaziers Hall in London.
Reibling was giving the keynote address -- Home Bias: Is the Grass Greener on the Other Side of the Fence? -- that explored the psychology of bias in investment.
Growing up ‘in a dilapidated, burnt out’ post world war two Germany he had developed curiosity about what other places looked like and as a teenager began to hitch hike. In the UK he got engaged. ‘I was a first year psychology student and German, and her family thought that there was a lot risk with this guy, and the risk/reward was too great and very little to add value, and that gave me my mission for my life. They separated us. From that point on I tried to prove them wrong.’
Now Taurus, a global real estate investor founded in Munich, has headquarters in Boston, Massachusetts.
At the core of any risk assessment, Reibling said, was time. You might assess certain risks, on a scale of one to 10, as a one -- but at a different time as a 10. So some psychological phenomena materialised in investments. This, he said, was like the home bias in investment after the 2008 market meltdown. ‘People say that the rest of the world doesn’t exist and the only thing that is important … is my home market. That always happens when there is a high perception of uncertainty.’
Now, though, there was enthusiastic real estate development in many places, record highs on the stock market and a different bias: an action bias whether at home or abroad.
Another speaker had said: ‘We have to do something, because if we do nothing, look at the money we lose.’ To laughter, Reibling said it was a painful thought ‘but probably you wouldn’t lose it if you don’t invest it’.
He referred to the recently shared 2013 Nobel Prize for Economics: ‘One of the winners was Eugene Fama CORRECT and he proposed diversification as one of the main ways to avoid certain risks and that diversification was your job.’
But diversification in investment was more complicated than it looked and even more complicated in real estate markets.
To explore the action bias, he suggested imagining yourself as a footballer taking a penalty. You go through ‘all kinds of algorithms of what to do’. But the goalkeeper could only stay put, or jump to the left or right. There were two minor options, jumping forwards or backwards, ‘but backwards is not a particularly good idea’.
Reibling said: ‘This is very important for you as investors to understand, because the correlation whether he jumps or not is not particularly high as far as shooting goals is concerned, but the correlation about how he experiences the action is totally different. So if you don’t move and the ball goes in the net it is much more painful than if you did something. Very often in the investment world, this is what we do. It is just too painful to do nothing because everybody says “hey, wake up and do something”.’
There was a natural tendency to extrapolate past and present developments. ‘So if in the past you jumped left and you were successful, the chances are that you will, intuitively, jump left again because you correlate past experiences with future events.’
Reibling said his personal bias was ‘doing things abroad without giving up what you do best at home’. Some investors were jumping on and off a moving train to buy assets they didn’t know in foreign markets. This was often a result of disappointing returns in the home market.
He said: ‘The belief that the grass is greener on the other side of the fence induces an “abroad bias”, neglecting one’s own expertise and knowledge about the home market. Allocation abroad is essential to risk reduction but excessive allocation to foreign markets can expose us to unknown risks in uncertain markets. My advice is to avoid over confidence in external markets and be aware and listen to your gut feeling.’
Reibling said some biases were also prejudices. While prejudice could be a positive protection against the unknown it was also a negative if you wanted to invest in foreign countries. For example, there were Germans who put money into the United States ‘but feel that people in the United States are inferior; intellectually, education wise, culturally and so forth.’
Reibling said: ‘You should not invest in places where you have a prejudice against the people. That is not a good thing, particularly when you exit the investment, as it might have a very strong impact on the reception you get from the market.’
The greatest challenge and the greatest risk, though, was to find the right people. ‘All this location stuff, location, location, location, is certainly true but it is only partially true because locations can also change, and particularly the value of the location, even if it is the best location, like luxury. In fact, prime locations might have higher fluctuations in value than secondary locations.
‘All our locations have local specialists with an established network and cultural background. These local specialists with a local cultural background are not other people; they are “our” people.’
The people component was often underestimated by investors. ‘Very often they don’t have the time to build those relationships because the companies they work for, they say “go to Singapore and buy a building”.’ When we go to new location we say “let’s go there and look around, go to the bars, to the universities and see what is happening”.’
That cost a lot of time and a lot of money. ‘Deals and businesses can be bought but relationships have to be built.’
An example was Taurus’s operation in India managed by RJ Prasad CORRECT, an electrical engineer from Trivandrum who completed a course at the MIT Centre for Real Estate. ‘Even with RJ Prasad, it took us three years to get to a point where we now feel comfortable to do a deal,’ said Reibling.
Taurus had turned down three or four deals that cost millions in due diligence and underwriting but felt sure about its decision not to enter primary markets after looking at the dominant players in places like Mumbai, Delhi and Bangalore ‘and we are not risk averse’.
That was shown by a mall with a 34-storey office tower just opened in Turkey. ‘It took us almost 10 years in Turkey doing small deals in Gallipoli, renovating multi-storey buildings to make friends with the population that counts, mainly the authorities, the cultural groups and others who said “hey, this is a good company, they are doing something that we should have done”.’
Reibling went on: ‘Investors are better off finding local and specialized experts who understand the investment particularities and each investment type, not investment location only, who understand the investment from their own experience and from having shown over longer periods of time, the ability to compete against local developers.’
Market developments for Europe and the US were difficult to predict as debt levels continue to rise, to Taurus’s concern. ‘Rising debt levels increase complexity -- as one perverse over-securitization did and led to a bubble that almost crashed the whole financial system. I don’t want to say that the same thing is happening now, but there are certain similarities as far as stability, to assume this.’
Yet the US was in a better than ever position to become one of the most competitive countries, even better than some of the emerging markets as far as the cost of goods produced, ‘because rates in the US have gone done considerably, productivity has gone up relatively well, and the inventiveness, the creativity is better than ever.’
With the Standard & Poor’s index rising at rates not seen since 2006, an investor should be pickier than ever in understanding exactly what he was doing. ‘That is something that is best to sleep on, do I really understand what I am doing, or do I do it because I have to move – “action bias”. And right now, and in particular, you do not want to be over-exposed in a single market.’
Taurus would continue to follow a value creation strategy that gave some protection from macro-economic conditions, he concluded. ‘We do not aim at increasing value speculatively but through work and ideas.’